People principally form corporations or limited liability companies to insulate themselves from personal liability for business debts. Sometimes, however, courts will hold a corporation or LLC’s shareholders or members are personally liable for business debts.

Ichter Davis recently represented a woman who was the sole shareholder of two Georgia corporations that operated franchised daycare businesses. The businesses failed during the recession, and, as a result, the franchisor obtained a default judgment against the companies for unpaid future royalty fees totaling more than $2 million. Realizing that the judgment was uncollectible, the franchisor sued the shareholder, claiming she was personally liable for the judgment under a theory of “piercing the corporate veil.”

Many small business owners fail to scrupulously follow corporate formalities and accounting practices. A creditor aggressively pursuing collection will often point to such shortcomings, and in particular “commingling” of corporate and personal assets and/or income, as evidence the owner treated the corporate entity as his or her alter ego to perpetrate a “fraud.” In such circumstances, equity may require the distinction between an entity and its owner(s) to be disregarded.

Fending off this “claim” requires a thorough understanding of the law in this area, business realities, and civil litigation tactics and procedures. Here, Ichter Davis was able to employ all the above to obtain a jury verdict in favor of its client. After only two hours of deliberation, a metro-Atlanta jury found our client was not liable for even a penny of the corporation’s debts. Notably, the franchisor has not appealed.

If you are business owner facing creditor claims, Ichter Davis has the experience and knowledge to defend you. If you are interested in a consultation, please contact Dan Davis at 404.869.5261 or ddavis@ichterdavis.com.